- North American Gold Mines (Barrick Nevada, Pueblo Viejo Mine, Dominican Republic) constitute 66% of the Trefis price estimate for Barrick Gold's stock.
- Other Gold Mines constitute 23% of the Trefis price estimate for Barrick Gold's stock.
WHAT HAS CHANGED?
Gold prices declined on average from 2011-2015. This trend prompted Barrick Gold to rationalize its portfolio of mines, in response to the subdued pricing environment. Though gold prices recovered in 2016 and 2017, followed by a lot of volatility in 2018, growth in prices in 2019 was driven by increased buying from central banks across the globe. Prices increased sharply in 2020 following the outbreak of coronavirus which led to sluggish economic growth outlook.
- Effect of Coronavirus
- Since the WHO announced a global health emergency due to coronavirus, stocks of major mining companies have declined. However, Barrick Gold saw a healthy rise in its stock price from $18.52/share on Jan. 31 to $24/share in December 2020. This is mainly due to the rising prices of gold. With industrial and economic activities slowing down due to the virus, prices of precious metals have increased as a safe haven. With 96% of Barrick's revenue being contributed by gold, the stock outperformed the market.
- Latest Earnings Performance
- Barrick Gold revenues increased 32% y-o-y in Q3 2020 when it reached $3.54 billion. Revenue growth was driven by 30% rise in gold price realization as global price shot up during the pandemic. Copper volume sold increased 78% while price also went up 13% during this period. Adjusted earnings improved to $0.41 per share in Q3 2020, better than $0.15 per share in the year-ago period. Improved earnings were a reflection of higher revenues and synergies from the Randgold merger and cost savings at Nevada due to a joint venture with Newmont Mining.
- Latest Annual Earnings Performance
- Barrick Gold reported an increase of 34% in revenues, which reached $9.7 billion in FY 2019. Revenue growth was attributed to a 21% rise in gold production to 5.47 million ounces as a result of strong performances at its 50% interest in the Veladero mine in Argentina and its 80% interest in the Loulo-Gounkoto mine in Mali. Additionally, nearly a 10% rise in average gold price realization to $1,396/ounce also contributed to revenue growth in FY 2019. Copper production increased 13%, offset by 4% decline in copper prices. Adjusted earnings improved to $0.51 per share in FY 2019, better than $0.35 per share in the year-ago period. Improved earnings were a reflection of synergies from the Randgold merger and cost savings at Nevada due to a joint venture with Newmont Mining, along with lower tax expense.
- Acquisition of Randgold Resources
- Barrick Gold acquired Randgold Resources in a $6.5 billion dollar deal which took effect on January 1, 2019. The new entity, with a combined revenue generating capacity of $10 billion dollar, owns five of the ten lowest-cost gold mines in the world. The combined entity is expected to benefit from Randgold’s superior gold grades over its rivals. Randgold’s average grade of 3.7 grams per ton over the last three years is much higher than Barrick’s average of 1.55 and the average of 1.12 grams per ton for the top five producers. This would translate into higher production at a lower cost. Also, Randgold’s disciplined management of inventory, stockpiles, and logistics has helped it to have 52 days of inventory outstanding, much lower than Barrick’s 132 days and Senior Gold Peers’ 78 days. These factors would help the combined entity in better cost management and higher cash flow generation. Benefiting from these synergies, we expect Barrick Gold's production, revenues, and profitability to increase in the near term.
- Strong growth in gold prices going forward
- Gold as an investment is often viewed as a hedge against inflation and macroeconomic and geopolitical uncertainty. Macroeconomic uncertainty caused by the unexpected outcome of the UK's June 2016 EU referendum and the uncertainty regarding North Korea’s nuclear agenda boosted gold prices in 2016 and 2017. Though prices are on a higher range in 2018, they saw some decline in the latter half of the year with rising interest rates in the U.S. However, in January 2019, gold prices again saw an uptick with major central bank of the world buying additional gold as a hedge against rising economic uncertainty. Following the bleak economic outlook with the outbreak of coronavirus, gold prices shot up in 2020.
- Divestment of non-core assets and rationalization of operating costs
- Barrick Gold has rationalized its business in response to the subdued gold pricing environment. It has divested several high-cost gold mines over the course of the past couple of years, as well as tried to reduce its operating costs. This is reflected in the company's all-in sustaining costs (AISC) metric, which is a measure of the overall costs required to sustain a company's current mining operations. The AISC for Barrick's gold mining operations fell from $915 per ounce in 2013, to $864 per ounce, $831 per ounce and $730 per ounce in 2014, 2015 and 2016 respectively. However, the company's most recent AISC was reported at a slightly higher figure of $806 per ounce in 2018 due to a planned increase in mine site sustaining Capex. The company expects its long-term AISC to be rangebound between $870-$920 per ounce over a five-year horizon. The impact of the divestment of high-cost mines was also reflected in the company's proven and probable reserve base, which fell from 104 million ounces at the end of 2013, to 62.3 million ounces at the end of 2018.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Barrick Gold's value that present opportunities for upside or downside to the Trefis price estimate for the company's stock:
Loulo-Gounkoto and Kibali Mines from Randgold acquisition
- Other Gold Mine Shipments:
The new mines after the acquisition of Randgold Resources are included in the company's other gold mines. We expect shipments from this segment to more than double in 2019, benefiting from the new mines post acquisition, and then to rise at a modest rate to reach 1.79 million ounces by the end of our forecast period. However, if the recovery rates from the mines improve much more than expectations and the output rises at a much faster rate to reach 2 million ounces by the end of our forecast period as opposed to 1.79 million ounces currently projected, it would represent a 3% upside to our price estimate.
Loulo-Gounkoto and Kibali Mines from Randgold acquisition
- Other Gold Mines EBITDA Margin: The acquisition of Randgold Resources is expected to help Barrick Gold achieve synergies in the form of higher grade ores, lower cost of production, better inventory management, and higher profits. Thus, we expect EBITDA margin to rise sharply in 2019 followed by modest increases to reach 44% by the end of our forecast period. However, if the synergies do not materialize as per expectations and the EBITDA margins grow at a slower pace to reach 41% by the end of the forecast period instead of 44% as projected currently, it would represent a downside of around 4% to our current price estimate.
Barrick Gold Corporation (NYSE:GOLD) is the world's largest gold mining company and is headquartered in Toronto. The firm operates primarily in four regions - North America, South America, Australia Pacific, and Africa. All four regions produce gold and produce copper in South America and Africa.
The company's total gold and copper reserves stood at 71 million ounces and 13.5 billion pounds, respectively, at the end of 2019. Barrick produced 5.5 million ounces of gold and 432 million pounds of copper in 2019.
SOURCES OF VALUE
Gold as the primary source of revenue
Gold mining is the most important division for Barrick Gold in terms of revenues and profits. In 2019, the company sold 5.47 million ounces of gold at an average realized price of $1,396 per ounce. It generated around $9.2 billion in revenues from the sale of gold and $0.4 billion from copper sales in 2019.
Rising demand for gold from emerging economies
Demand for gold is expected to be quite robust from major emerging economies. Rapidly growing middle-class populations and rising incomes in these countries, particularly China and India -- the world's largest gold consumers -- are expected to result in a sustained jewelry and investment demand for gold. India & China's jewelry demand increased by 12% & 3%, respectively in 2017 and investment demand from each of the country grew by 2% & 8%, respectively.
Recovery in global demand and prices for copper
The global demand outlook for copper and the prices of the metal have risen significantly in the past one year. China, the world's largest consumer of copper, has witnessed a stable GDP growth of 6.9% in 2017 from 6.7% in 2016. The Chinese government had instituted a fiscal stimulus targeting the infrastructure and manufacturing sectors to boost its economy in 2016 which has helped foster this growth and boosted the demand outlook for copper from China. Additionally, China's fight for the blue sky has increased its demand for refined copper, substituting the demand for scrap, further supporting prices. A considerably enthusiastic outlook for increased usage of Electric Vehicles (EVs) and President Trump's plans for a $1.5 trillion revamp of U.S. infrastructure has also raised the demand outlook for copper globally and thus created a favorable market environment for copper in 2019 and beyond.